I’m going to file Chapter 13 Bankruptcy, but I don’t want to include my car. Can I do that?
No. At least, not unless you have a really compelling reason to do so. I’ll tell you why in a minute. But first, let’s talk about some definitions. As a lawyer, I get a lot of questions from folks who want to keep a certain debt or two “out of the bankruptcy.” And I always have to ask: what do you mean? Most folks want to keep a certain credit card (maybe for convenience when they don’t have cash) or keep their “good name” with a particular creditor or with a co-signor. That’s fine, and I understand the impulse, but it’s technically impossible to keep any debt out of your bankruptcy. Even in the rare cases where you can pay a debt directly to the creditor and not through the Chapter 13 Trustee, that direct payment has to be spelled out in the Chapter 13 plan you file with the Bankruptcy Court, and therefore is technically a part of your bankruptcy plan.
And regardless of how you end up paying them, all of your creditors have a right to be notified of your bankruptcy filing, as do all of your co-signors. I get it. It’s embarassing, and you may wonder why they have to know about it, but think about it from their standpoint: if someone you co-signed a loan with filed bankruptcy, wouldn’t you want to know? Yeah.
So let’s move on to how you can (or can’t) keep a particular creditor from being paid through the Bankruptcy Plan.
As a general rule, the Trustee will insist that you pay all short term debts through the plan. “Short term” in this case meaning debts whose last payment is due before your plan ends. So if you have 4 years left on your car note and your bankruptcy plan is going to be 5 years, the car note is considered a short term debt.
However, if you had one of those ridiculous 7 year car loans with a low interest rate and a 5 year bankruptcy, then you could possibly get away with paying the car note directly because that would cost you less. Paying the car off through your bankruptcy case requires you to cram those 7 years of payments into your 5 year Chapter 13 plan, which naturally increases the amount you’ll have to pay each month. If you have the income to afford it, that’s fine because you’ll have your car paid off that much sooner. But otherwise, you’re better off paying it directly.
The “long term” car note is a rare case, though. The vast majority of car notes are paid through the trustee payments. Indeed, this is what most debtors want to do, because most debtors file Chapter 13 precisely because they are behind on their payments and want to use the Chapter 13 process to cure their defaults. In other words, when you’re already in ‘bad standing’ or ‘default’ with a creditor, you don’t care if they have to wait until the Trustee sends them their money.
The other situation where it may be possible to pay a particular debt directly rather than through the Trustee is where that debt is secured by valuable collateral and is being paid by a co-signor who is not part of the bankruptcy. Example: Debbie files Chapter 13. She’s a co-signor on her father’s truck, and her father pays the truck note every month. If she includes it in her Chapter 13 case, her father’s credit may take a hit. To prevent this, she includes a provision in her plan stating that the truck will be paid directly by a non-filing co-signor.
But those are the exceptions. The fact of the matter is, if you owe someone money, they are going to have to eventually learn about your bankruptcy filing, and in Chapter 13, you will most likely have to pay them through the bankruptcy plan.